Stale Information, Shocks and Volatility

Abstract:     
We propose a new approach to measuring the effect of unobservable private information on volatility. Using high-frequency intraday data, we estimate the volatility effect of a well identified shock on the volatility of the stock returns of large European banks as a function of the quality of available public information about the banks. We hypothesise that, as the publicly available information becomes stale, volatility effects and its persistence should increase, as the private information (or beliefs) of investors becomes more important. We find strong support for this idea in the data, also for alternative measures of dispersion of beliefs among investors, such as bid-ask spreads, trading volume and earnings forecasts. We argue that the results have implications for debate surrounding the opacity of banks and transparency requirements imposed on banks by regulators.

Number of Pages in PDF File: 45

Keywords: Banks, realised volatility, public information, opacity

JEL Classification: G21, G14

working papers series